Market Overview

Bassett Announces Fiscal Fourth Quarter Results


BASSETT, Va., Jan. 17, 2019 (GLOBE NEWSWIRE) -- Bassett Furniture Industries, Inc. (Nasdaq:  BSET) announced today its results of operations for its fiscal quarter ended November 24, 2018.

Fiscal 2018 Fourth Quarter Highlights
(Dollars in millions)      
  Sales   Operating Income
  4th Qtr   Dollar %   4th Qtr % of   4th Qtr % of
    2018   2017   Change Change    2018   Sales    2017 Sales
Consolidated (1) $   116.6 $   118.2   $   (1.6 ) -1.3 %   $   2.0   1.8 %   $   7.5 6.3 %
Wholesale $   65.2 $   63.2   $   2.0   3.3 %   $   2.9   4.4 %   $   4.0 6.3 %
Total Retail $   70.1 $   72.1   $   (2.0 ) -2.8 %   $   (1.3 ) -1.8 %   $   2.1 2.9 %
57 Comparable Stores $   64.7 $   68.4   $   (3.7 ) -5.3 %   $   0.4   0.6 %   $   3.5 5.2 %
Logistical Services (2) $   20.1 $   21.6   $   (1.5 ) -6.7 %   $   0.6   3.2 %   $   1.2 5.7 %
(1) Our consolidated results include certain intercompany eliminations.  See the "Segment Information" table below for an illustration of the effects of these intercompany eliminations on our consolidated sales and operating income.
(2) Current and prior period sales have been retrospectively restated to reflect the transfer of intercompany home delivery services from logistical services to retail. The effect of the transfer on operating income was not material.

Net income for the quarter was $1.9 million or $0.18 per diluted share as compared to net income of $5.0 million or $0.46 per diluted share for the prior year quarter.  Included in the consolidated operating income for the quarter ended November 24, 2018 is an impairment charge of $0.5 million associated with the writeoff of fixed assets for an underperforming retail store location in Torrance, CA and a lease exit charge for $0.3 million associated with the closure of an underperforming store in San Antonio, TX.  In addition, the Company recorded a $0.7 million tax benefit arising from the final adjustment to our interim estimates of the impact of reduced federal income tax rates on the valuation of our deferred tax assets. Excluding these items, consolidated operating income for the quarter would have been $2.8 million or 2.5% of sales and net income would have been $1.8 million or $0.17 per diluted share.

"As we have discussed throughout 2019, in recognition of the rapidly changing environment surrounding our sector and retail in general, we began 18 months ago to study and implement a number of measures to transform our business and to ensure a solid future for our 116 year old company," commented Rob Spilman, Chairman and CEO.  "We are currently in the midst of the executional phase of several of these initiatives.  The expense involved with building for the future coupled with less than expected sales in our corporate stores adversely affected our financial results in 2018; particularly in the 4th quarter.  Our task at hand is to bring several of these projects to fruition while returning our existing stores to organic growth.  We plan to accomplish this objective through more robust digital engagement with our consumers, higher levels of interactive customer service, and an expanded product assortment designed to work together to increase our brand's reach and capabilities.  And, while we invest in the future, we remain mindful of the present as we returned $14.7 million of the $28.7 million of operating cash flow that we generated in fiscal 2018 to shareholders in the form of dividends and share buybacks."

"For the quarter, consolidated revenue declined by 1.3% to $116.6 million, thus ending a tumultuous year for Bassett," continued Spilman.  "Raw material price increases, new tariffs on imported goods, new store startup expenses, investments in digital marketing, and higher health care costs were some of the challenges that characterized the year.  In all, eight new Bassett Home Furnishings stores opened in 2018 including six corporate stores and two licensed locations.  In addition, our first clearance center was opened and three stores were closed.  In December, the first month of fiscal 2019, three additional corporate stores came on and a new licensee store in Boise, Idaho opened.  Looking ahead, there will be four additional corporate stores to open in 2019.  After that, there are very few additional stores being considered for the near term as we plan to focus on existing store productivity and digital outreach to the consumer.  We are also exploring prudent means to reduce our cost structure in certain areas as we tailor our organization and our business model to the requirements of the future."

Wholesale Segment                                                                                       

Net sales for the wholesale segment were $65.2 million for the fourth quarter of 2018 as compared to $63.2 million for the fourth quarter of 2017, an increase of $2.0 million or 3.3%.  This increase was driven by $2.4 million in sales from Lane Venture, acquired during the first quarter of 2018, and a 1.3% increase in furniture shipments to the open market (outside the Bassett Home Furnishings network), partially offset by a 0.7% decrease in shipments to the Bassett Home Furnishings network, as compared to the prior year period.  Gross margins for the wholesale segment were 33.8% for the fourth quarter of 2018 as compared to 34.1% for the prior year quarter.  This decrease was primarily driven by the lower margins in the domestic upholstery operations due to higher labor costs from unfavorable health care experience and unfavorable fixed cost absorption due to lower sales volumes.  This decrease was partially offset by higher margins in the domestic wood operations due to greater absorption of fixed costs from higher sales volumes and improved overall operating efficiencies.  Wholesale SG&A for the fourth quarter of 2018 was $19.1 million as compared to $17.6 million for the prior year period. SG&A as a percentage of sales increased to 29.4% as compared to 27.8% for the fourth quarter of 2017.  This increase in SG&A as a percentage of sales was primarily driven by higher digital marketing and other brand development costs and higher employee health care expenses from unfavorable claim experience, partially offset by lower incentive compensation.  Operating income was $2.9 million or 4.4% of sales as compared to $4.0 million or 6.3% of sales in the prior year. 

"Wholesale sales grew by 3.3% for the quarter and 2.7% for the year," said Spilman.  "Leading the way was our wood operation as both our domestically made Bassett Custom Wood and imported Bassett Casegoods posted sales increases for the quarter.  In fact, for the year, sales and profitability at our two Virginia based wood manufacturing facilities hit all-time highs.  Sales of U. S. made Bassett Custom Upholstery were off slightly for the quarter, although we have high hopes for the newly launched HGTV Design Studio by Bassett product.  This product has been our theme song for many years of positive growth but began to markedly decline in the back half of 2018.  We are very pleased with the first few weeks of sales of the new product that we have seen in the stores since Christmas.  Finally, we look forward to the new year with the startup of the Lane Venture acquisition behind us.  We have two new wholesale showrooms, a stronger sales force, an improved product line, a new manufacturing platform, and a new warehouse to underscore our commitment to the Lane Venture brand and the outdoor furniture category to show for our efforts in 2018."

Retail Segment

Net sales for the 65 Company-owned Bassett Home Furnishings stores were $70.1 million for the fourth quarter of 2018 as compared to $72.1 million for the fourth quarter of 2017, a decrease of $2.0 million or 2.8%. The overall decrease was due to a 5.3% decrease in comparable store sales partially offset by a $1.6 million increase in non-comparable store sales. 

While the Company does not recognize sales until goods are delivered to the consumer, management tracks written sales (the retail dollar value of sales orders taken, rather than delivered) as a key store performance indicator.  Written sales for comparable stores decreased by 7.5% for the fourth quarter of 2018 as compared to the fourth quarter of 2017. 

The consolidated retail operating loss for the fourth quarter of 2018 was $1.3 million as compared to operating income of $2.1 million for the fourth quarter of 2017, a decrease of $3.4 million.  The 57 comparable stores generated operating income of $0.4 million for the quarter, or 0.6% of sales, as compared to $3.5 million, or 5.2% of sales, for the prior year quarter. Gross margins for comparable stores were 51.3% for the fourth quarter of 2018 as compared to 52.6% for the fourth quarter of 2017.  This decrease was primarily due to the selloff of existing floor samples and other clearance product as a result of the repositioning of two stores in the Houston market.  SG&A expenses for comparable stores increased $0.3 million to $32.8 million or 50.6% of sales as compared to $32.4 million or 47.4% of sales for the fourth quarter of 2017 primarily due to higher advertising costs and employee health care expenses from unfavorable claim experience, partially offset by lower warehouse and delivery expenses from the previously announced transition of the Bassett final mile service from Zenith to the Corporate retail operation.

Non-comparable stores generated sales of $5.4 million with an operating loss of $1.7 million as compared to sales of $3.7 million and an operating loss of $1.4 million in the prior year quarter.  As part of the $1.7 million loss for the fourth quarter of 2018, the Company incurred $0.6 million in new store pre-opening costs, a decrease of $0.2 million from the prior year.  In addition, the Company incurred $0.4 million of post opening startup losses compared to $0.1 million in the fourth quarter of 2017.  As previously stated, the Company's retail expansion is initially costly.  However, the Company believes that site selection and new store presentation will generally result in locations that operate at or above a break-even level within a reasonable period of time following store opening.

"Corporate retail turned in a disappointing performance for the quarter," continued Spilman.  "The 5.3% decline in comparable delivered sales prevented us from continuing our seven consecutive year record of increasing comparable store sales as we fell 1.6% for the entire year.  It is interesting to note that 70% of our yearly decline stemmed from declining sales from our legacy HGTV Design Studio at Bassett upholstery product which we have totally redesigned and replaced with new product that hit the floors in December.  Once again, we are pleased with the initial sell-through of the newly introduced program.  All in all, it was a difficult and busy quarter as we opened two stores, closed two, and were in the midst of floor sets for the three new stores that opened in December.  Also, we assumed the operation and the personnel of 10 Zenith home delivery centers in the period, which will allow us to focus on the personalized delivery service that the Bassett customer expects.  Another point of interest is the change in mix of our advertising dollars for the quarter.  We began preparation this summer for the addition of a larger share of digital advertising spending for the September – November period.  Although we cut back on some television and direct mail, we ultimately overspent our normally disciplined advertising allocation significantly in the quarter.  Since that time, we have returned to normalized levels of spending.  Results for the new strategy have been mixed but are improving.  Web traffic and engagement have spiked markedly since we moved into 2019.  The change in advertising mix is being monitored weekly on a market by market level and we are committed to a more robust digital marketing program for the future."

"We opened our new Frisco, Texas Generation 3 prototype store mid-September and the first three months of performance have been strong," added Spilman.  "Our custom furniture and in-home design capabilities are showcased through a much larger design center, an expanded display of accessories, and a new fixture package.  Consumers are gravitating to the interactive wall-mounted screens to visualize the many options in our customizable furniture.  We have been investing for over a year to digitize every SKU in our assortment to bring each item and the accompanying options to life on the web and in the store. The Generation 3 store is the natural extension of our web experience, whether mobile or desktop, which we will further integrate with the in store experience as we move ahead.  And, as we slow the pace of our new store rollout in the near term, we plan to begin to migrate the most compelling elements of the Generation 3 stores to the existing store network this year."

Logistical Services Segment                           

Revenues for Zenith were $20.1 million for the fourth quarter of 2018 as compared to $21.6 million for 2017, a decrease of $1.4 million or 6.7%.  This decrease was primarily due to freight reductions from one significant external customer. Zenith's operating expenses were $19.5 million or 96.8% of sales as compared to $20.3 million or 94.3% of sales for the prior year period.  This increase in expenses as a percent of sales was primarily due to increases in fuel costs coupled with reduced leverage of fixed costs partially offset by lower incentive compensation.

"Zenith also faced a number of challenges that required operational adjustments during 2018," observed Spilman.  "The well-chronicled labor shortage that confronts the U. S. Trucking industry intensified its effect on Zenith.  As mentioned, the decision was made to exit the home delivery business, driven largely by the desire to focus on the legacy 3PL and middle mile segments for which Zenith is favorably regarded in the furniture industry.  Demand for its services in these areas remains high and the renewed focus on these core competencies should allow more time to be spent on driver recruitment and refinement of the operating model.  Profitability should also improve as the competing priorities and scheduling demands of the e-commerce community did not mesh well with the white glove requirements of delivering high quality furniture to the home.  We enter 2019 contemplating a renewed emphasis on our ‘30 days in the home' commitment for custom furniture – and we mean real custom furniture, not just another color of fabric on a standard frame.  For those simpler transactions that others masquerade as ‘custom' furniture, we are exploring a much faster delivery promise."

About Bassett Furniture Industries, Inc.

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